Knock-Out Option

AAA

DEFINITION of 'Knock-Out Option'

An option with a built in mechanism to expire worthless, should a specified price level be exceeded. A knock-out option sets a cap to the level an option can reach, in favor of the holder. As knock-out options limit the profit potential for the option buyer, they can be purchased for a smaller premium than an equivalent option without a knock-out stipulation.

INVESTOPEDIA EXPLAINS 'Knock-Out Option'

For example, an option writer may write a call option on a $40 stock, with a strike price of $50 and a knock out level of $60. This option only allows the option holder to profit up to $60, at which point the option will expire worthless, thus limiting the loss potential for the option writer.

Knock-out option are considered to be exotic options and are primarily used for commodities and currency options.

RELATED TERMS
  1. Exchange Rate

    The price of a nation’s currency in terms of another currency. ...
  2. Rebate Barrier Option

    A financial derivative product that will automatically expire ...
  3. Vanilla Option

    A financial instrument that gives the holder the right, but not ...
  4. Forex - FX

    The market in which currencies are traded. The forex market is ...
  5. Knock-In Option

    A latent option contract that begins to function as a normal ...
  6. Option

    A financial derivative that represents a contract sold by one ...
Related Articles
  1. How To Avoid Closing Options Below Intrinsic ...
    Options & Futures

    How To Avoid Closing Options Below Intrinsic ...

  2. Pin Down Stock Price With Real Options
    Investing Basics

    Pin Down Stock Price With Real Options

  3. Cut Down Option Risk With Covered Calls
    Options & Futures

    Cut Down Option Risk With Covered Calls

  4. Options Basics Tutorial
    Options & Futures

    Options Basics Tutorial

comments powered by Disqus
Hot Definitions
  1. Letter Of Credit

    A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. ...
  2. Due Diligence - DD

    1. An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to ...
  3. Certificate Of Deposit - CD

    A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate ...
  4. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  5. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  6. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
Trading Center